Faculty of Economics and Business

Academic year 2013-2014

On the first page of this exam form you will find important information about this
exam.
Please read the information below before answering any exam questions!

Exam: Financiering (6011P0122) and Finance (6011P0135)

Date and time of the exam: Tuesday, April 22
Duration of the exam: 1 hour
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Specific information on this exam: <15 multiple choice questions equally weighted.>

Version code 2
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On the answer sheet, Answer A corresponds with 1, B with 2, C with 3 and D with 4

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Question 1
The distinguishing feature of a corporation is that:
A) it spreads liability for its corporate obligations to all shareholders.there is no legal
difference between the corporation and its owners.
B) provides limited liability only to small shareholders.
C) it spreads liability for its corporate obligations to all shareholders.
D) it is a legally defined, artificial being, separate from its owners.
Answer: D
Question 2
A company sells a product to a customer at a profit, who will pay after two weeks. Which of
the following items change right now?
1) Accounts payable
2) Accounts receivable
3) Cash
4) Inventory
A)
B)
C)
D)

All items change

1, 2
2, 3, 4
2, 4

Answer: D
Question 3
AvU had a share price of $49.20. They had 81.33 million shares outstanding, a market-tobook ratio of 2.76. In addition, AvU had $745.01 million in outstanding debt, $263.82
million in net income, and cash of $157.09 million.
AvUs enterprise value is closest to:
A) $4,589.36 million
B) $4,168.06 million
C) $4,425.15 million
D) $4,952.16 million
Answer: A
Explanation: A) Enterprise Value = MV Equity + Debt - Cash = $49.2 81.33 +$745.01 $157.09 = $4589.36

Use the table for the question(s) below.

Consider the following balance sheet:
Luther Corporation
Consolidated Balance Sheet
December 31, 2012 and 2011 (in $ millions)

Assets
Current Assets
Cash
Accounts receivable
Inventories
Other current assets
Total current assets

2012

2011

63.6
55.5
45.9
6.0
171.0

58.5
39.6
42.9
3.0
144.0

Long-Term Assets
Land
Buildings
Equipment
Less accumulated
Depreciation
Net property, plant, and equipment
Goodwill
Other long-term assets
Total long-term assets

66.6
109.5
119.1

62.1
91.5
99.6

(56.1)
239.1
60.0
63.0
362.1

(52.5)
200.7
-42.0
242.7

Total Assets

533.1

386.7

Liabilities and Stockholders' Equity

Current Liabilities
Accounts payable
Notes payable/
short-term debt
Current maturities of long-term debt
Other current liabilities

2012

2011

87.6

73.5

10.5
39.9
6.0
144.0

9.6
36.9
12.0
132.0

Total liabilities
Stockholders' Equity

239.7
--239.7
22.8
--262.5
406.5
126.6

168.9
--168.9
22.2
--191.1
323.1
63.6

Total liabilities and Stockholders' Equity

533.1

386.7

Total current liabilities

Long-Term Liabilities
Long-term debt
Capital lease obligations
Total Debt
Deferred taxes
Other long-term liabilities
Total long-term liabilities

Question 4
When using the book value of equity, the debt to equity ratio for Luther in 2012 is closest to:
A) 0.43
B) 2.29
C) 2.98

D) 3.57
Answer: B
Explanation: B) D/E = Total Debt/Total Equity
Total Debt = (notes payable (10.5) + current maturities of long-term debt (39.9) + long-term
debt (239.7) = 290.1 million
Total Equity = 126.6, so D/E = 290.1/126.6 = 2.29
Question 5
Which of the following statements regarding the valuing of costs and benefits is not correct?
A) The first step in evaluating a project is to identify its costs and benefits.
B) Competitive market prices allow us to calculate the value of a decision without worrying
about the tastes or opinions of the decision maker.
C) In the absence of competitive markets, we can use one-sided prices to determine exact cash
values.
D) Because competitive markets exist for most commodities and financial assets, we can use
them to determine cash values and evaluate decisions in most situations.
Answer: C
Question 6
You are manager in a US company that has an investment opportunity in the Netherlands that
requires an investment of $350,100 today and will produce a cash flow of 326,670 in one
year with no risk. Suppose the risk-free rate of interest in Netherlands is 6% and the current
competitive exchange rate is 0.88 to $1.00. What is the NPV of this project in dollars?
Would you take the project?
A) NPV = -$104; No
B) NPV = $2,358; Yes
C) NPV = $3,650; Yes
D) NPV = $104; Yes

Answer: D
Explanation: d) NPV = -350,100 + (326,670/1.06) $1.00/0.88 = $104, so since NPV is >
0, accept
Question 7
Which of the following is false:
A) The interest rates that are quoted by banks and other financial institutions are real
interest rates.
B) The rate of growth of your purchasing power, after adjusting for inflation, is determined
by the real interest rate.
C) The real interest rate is approximately equal to the nominal interest rate less the rate of
inflation (when inflation rates are low).
D) The growth in purchasing power is equal to the growth of money divided by the growth of
prices.
Answer: A

The interest rates that are quoted by banks and other financial institutions, and that we have
used for discounting cash flows, are nominal interest rates, which indicate the rate at which
your money will grow if invested for a certain period.
Question 8
Taggart Transcontinental currently has a bank loan outstanding that requires it to make three
annual payments at the end of the next three years of $1,000,000 each. The bank has offered
to allow Taggart Transcontinental to skip making the next two payments in lieu of making
one large payment at the end of the loan's term in three years. If the interest rate on the loan is
6%, then the final payment that the bank will require to make Taggart Transcontinental
indifferent between the two forms of payments is closest to:
A)
B)
C)
D)

$3,375,000
$3,184,000
$3,000,000
$2,673,000

Answer: B
Explanation: B) FV = PV(1 + i)N = $1,000,000(1.06)2 + 1,000,000(1.06)1 + 1,000,000 =
3,183,600
Question 9
Which of the following statements is FALSE?
A) The difference between an annuity and a perpetuity is that an annuity ends after some
fixed number of payments.
B) An annuity is a stream of N equal cash flows paid at irregular intervals.
C) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a
constant rate forever.
D) Most car loans, mortgages, and some bonds are annuities.

Answer: B
Explanation: B) annuities are paid at regular intervals.
Question 10
You are purchasing a new home and need to borrow $250,000 from a mortgage lender. The
mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate annuity mortgage.
Assuming you borrow from the mortgage lender at 6.25%, then your monthly mortgage
payment (with payments made at the end of the month) will be closest to:
A) $1600
B) $1540
C) $708
D) $694

Answer: B

Explanation: B) First we need the monthly interest rate = APR/k = .0625/12 = .005208 or
.5208%.
250000 = PMT (1/0.005208) (1 - 1/(1.005208360))
PMT = $1539.29
Question 11
Consider a project with the following cash flows:
Year
0
1
2
3
4

Cash Flow
-10,000
4,000
4,000
4,000
4,000

Assume the appropriate discount rate for this project is 15%. The IRR for this project is
closest to:
A) 15%
B) 21%
C) 22%
D) 60%
Answer: C
Explanation: C) CF0 = -10000
CF1 = 4000
CF2 = 4000
CF3 = 4000
CF4 = 4000
Compute IRR = 21.86% using annuity formula or via trial and error and extrapolation
Question 12
Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue. The
book took one year to write. In the time she spent writing, Palin could have been paid to give
speeches and appear on TV news as a political commentator. Given her popularity, assume
that she could have earned $8 million over the year (paid at the end of the year) she spent
writing the book. Assume that she was unable to fulfill her media commitments of appearing
on TV news as a political commentator or give speeches. while she was writing the book.
Assume that as soon as her book is finished, it is expected to generate royalties of $5 million
at the end of the first year and these royalties are expected to decrease by 40% per year in
perpetuity. Assuming that Palin's cost of capital is 10% and given these royalties payments,
the NPV of Palin's book deal is closest to:
A) $12.20 million
B) $13.00 million
C) $13.75 million
D) $3.75 million

Answer: B
Explanation: B) NPV = $11 - $8/(1.10)1 + $5/(.10 - -0.40)/1.10 = $ 12.81818
Question 13
Consider the following two projects:

Project
Alpha
Beta

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discount

C/F
C/F
C/F
C/F
C/F
C/F
C/F
C/F
Rate
-79
20
25
30
35
40
N/A
N/A
15%
-80
25
25
25
25
25
25
25
16%

Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision
and the best rational for that decision is to
A) invest in project Beta since NPVBeta > 0.
B) invest in project Alpha since NPVBeta < NPVAlpha.
C) invest in project Beta since IRRB > IRRA.
D) invest in project Beta since NPVBeta > NPVAlpha > 0.
Answer: D
Explanation: D) NPV Alpha
NPV = -79 + 20/(1.15)1 + 25/(1.15)2 + 30/(1.15)3 + 35/(1.15)4 + 40/(1.15)5 = 16.92
NPV Beta
NPV = -80 + 25/(1.16)1 + 25/(1.16)2 + 25/(1.16)3 + 25/(1.16)4 + 25/(1.16)5 +
50/(1.16)6 + 25/(1.16)7 = 20.96
You do not need to calculate IRRs

Question 14
Which of the following statements is FALSE?
A) Depreciation expenses have a positive impact on free cash flow.
B) The firm cannot use its earnings to buy goods, pay employees, fund new investments, or
pay dividends to shareholders.
C) Free Cash Flow = (Revenues - Costs - Depreciation) (1 - c) - Capital Expenditures NWC + c Depreciation.
D) The depreciation tax shield is the tax savings that results from the ability to deduct
depreciation.
Answer: C
Question 15
Which of the following statements is FALSE?
A) Project externalities are direct effects of the project that may increase or decrease the
profits of other business activities of the firm.
B) Incremental earnings are the amount by which the firm's earnings are expected to change

as a result of the investment decision.

C) The average selling price of a product and its cost of production will generally change over
time.
D) Any money that has already been spent is a sunk cost and therefore irrelevant in the capital
budgeting process.
Answer: A

Formula sheet
Financiering / Finance

PV (CF)

FV (CF)
NPV
NPV = PV Investment
PV perpetuity

PV growing
perpetuity
PV annuity

PV (annuity of C for N periods with interest rate r ) C

PV growing
annuity

EAR

After-tax
interest rate

r ( r ) r (1 )

1
r

1
1

(1 r ) N